Question

The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?
a.$30.57

b.$31.52

c.$32.49

d.$33.50

e.$34.50

Answer 1

Hello there!

Your question asks what would be the current stock price.

Answer: D). $33.50

In order to find the solution to your question, we're going to need to find how much growth the stock made in 3 years, and see how much it grew by 6% after the 3 years. WE also need to calculate the "rs" into the stock price.

Lets solve:

D = Dividend

(Numbers next to D) = Years

$D0 = 1.25\\\\ \text {We would multiply 1.25 by 1.15}\\D1 = 1.25*1.15 = 1.44\\\\D2 = 1.44*1.15 = 1.66\\\\D3 = 1.66*1.15 = 1.91\\\\ \text {We would now multiply by 1.06}\\\\D4 = 1.91*1.06 = 2.02\\\\\text {Price of stock at end of Year 3} = (2.02)/(.11-.06) = 40.40\\\\\text {Current Price of the stock} = \\1.44/1.11 + 1.66/(1.11^2) + (1.91+40.40)/(1.11^3) = 33.58$

Once you're done solving, you should get 33.58. Since it's not an answer choice, we'll just choose the one that's close to it.

Therefore, you should get the answer D). $33.50

Answer choice D). $33.50 should be your FINAL answer.

I hope this helps!

Best regards, MasterInvestor